Many people are confused when it comes to what the official retirement age(s) are. Which is unfortunate, because this is key for figuring when you can access your retirement savings without penalty, and to figure out how much you need to save for retirement. Here then is a quick recap of the key age milestones you need to be aware of when it comes to tax advantaged retirement saving plans and social security, the source of retirement funds for most people.
401K, IRA and other tax advantaged retirement plans
The key ages at which you can withdraw funds from the most commonly used retirement accounts without paying a penalty are:
401K and 403b retirement plans are generally company sponsored and the age at which you can start taking penalty (10%) free withdrawals is 59½ . However, you must start taking the minimum distribution (based on a variety of factors) by age 70½. You will have to pay regular income taxes on any withdrawals from 401K plans.
IRA are self-run tax-deferred retirement plans with investors being able to deduct all or part of their contributions from pretax income if certain conditions are met. Like a 401K, the official retirement age at which you can make penalty free withdrawals is 59½. You also may owe an excise tax if you do not begin to withdraw minimum distributions by April 1st of the year after you reach age 70½.
Roth IRA. Because a Roth IRA does not permit a tax deduction at the time of contribution, the restrictions on withdrawals are a little different to a traditional IRA. Contributions can also be made to your Roth IRA after you reach age 70½, unlike a traditional IRA. There is no requirement to start taking distributions while the owner is still alive and in fact the entire proceeds can be passed to your heirs tax free, a very useful estate planning feature. If you do take the tax free distributions, you can only do so after the savings have been in the account for a 5-year period beginning with the first taxable year for which a contribution was made (known as qualified distributions). Also, the IRA age limit for withdrawal still applies where you can only take penalty (10%) free distributions after you reach age 59½. A Roth IRA also allows you to take a one-time penalty and tax free $10,000 withdrawal if buying your first home.
There are exceptions to the above age limits based on special conditions and extenuating circumstances like spouse death, hardship, disability and qualified medical expenses. Also the payments from retirement plans can be provided as lump-sum distributions or via periodic payments (eg like an annuity) depending on the terms of the plan. Consult the IRS website and your plan administrator (e.g Vanguard, Fidelity etc) for detailed rules and regulations.
Social Security benefits
The earliest age a person can start receiving Social Security retirement benefits is 62, but if they hold off receiving benefits till their full retirement age – 65 or 67 for people born after 1959 – they can increase the amount of benefits they are entitled too. There is also even more of a benefit to delay social security benefits after your full retirement age. In fact if you wait till age 70, you increase your social security annual benefits payment by about 8%. The benefit increase no longer applies after age 70, even if you continue to delay taking benefits.
Just as the government rewards you for working longer and delaying when you draw down on social security, they also penalize you for taking it too early. In fact if you take your SS benefits before the full retirement age is 67 you will be hit as follows:
- If you are 62 and take SS you will receive about 30 percent less than if you take the benefit at age 67;
- age 63 is about 25 percent;
- age 64 is about 20 percent;
- age 65 is about 13 and 1/3 percent; and
- age 66 is about 6 and 2/3 percent.
Bottom line : Wait till at least 67 to take your social security benefits, and if possible wait till 70 to really maximize your social security benefits payment.